Ahram Weekly

In the doldrums

The bankers and speculators are not responsible for the Egyptian pound’s current problems. Instead, the finger of blame points squarely at the politicians

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Al-Ahram Weekly

A post-revolution drop in tourism and foreign direct investment has deeply harmed the economy as well as the Egyptian pound. Hayat Yehia examines how the dollar’s rise against the pound has affected all aspects of life and interviews head of research at EFG-Hermes on the issue

The Egyptian pound is not pegged to the dollar, but it might as well be as the basket of currencies, including the euro and yen, to which the pound is pegged that is dominated by the dollar. So whenever the pound starts wobbling, it is the exchange rate with the dollar that comes to mind.
Recently the pound has wobbled a lot, mostly in a downward direction, for reasons related to the steady erosion of Egypt’s foreign currency reserves. Since the drop in tourism and foreign direct investment began in the aftermath of the 25 January Revolution, the country’s economic fortunes, and the pound’s as a result, have taken a turn for the worst.
The dollar has been rising inexorably against the Egyptian pound, and the immediate impact has not been hard to see for a country that buys 70 per cent of its food from abroad. It’s a Catch-22 situation: the more protests and industrial strikes, the less the country produces, the more capital flees abroad and the fewer tourists come, meaning that there is less income to go round.
A recent study by the Egyptian Centre for Social and Economic Rights said that 2012 was a “bumper year” for protests and sit-ins, with about 1,381 protests staged in the government and public sector, 1,205 in local communities, 410 in private businesses, 222 in government-run companies, and 204 by self-employed professionals.
Tourism was also badly hit in the aftermath of the revolution. In 2010, Egypt earned $12.6 billion, or nearly 19.3 per cent of its foreign currency takings, from tourism, a report by the Ministry of Tourism said. After the revolution, the downturn in tourism was sharp and sudden.
Hotels began reporting a loss of business almost immediately, and by February 2011 tourism revenues were down by one quarter. Since then, hotel owners have complained of occupancy rates as low as 20 per cent or even less.
This has not been the fault of the business side of the trade. The main reason tourists are staying away is that the country appears to have lost its political and security bearings. Electing a president and writing a new constitution did not seem to help. What matters for the tourism industry are the recurring acts of violence that have swept the country over the past two years.

FACTS AND FIGURES: However, the official figures suggest that tourism is still plodding on. Alaa Al-Hadidi, the cabinet spokesman, has said that eight million tourists visited Egypt between July 2012 and February 2013, bringing in $7.6 billion.
But investors have still been reluctant to pump cash into Egypt’s flailing economy. According to the Central Bank of Egypt, the country saw an influx of $301 million between July and December 2012, but the outflow in the same period was $411 million.
Since January 2011, the country has been dipping into its foreign currency reserves as if there was no tomorrow, and today the level of reserves is only enough to buy imports for about three months. From some $35 billion before the revolution, foreign currency reserves have now dipped to $13 billion.
As the reserves dwindle, the Central Bank has been finding it harder and harder to support the pound. Up until September 2012, the dollar was exchanging at LE6 in dozens of money exchange offices that clutter Cairo streets. Since then, things have become harder, however, and while the Central Bank is still trying to defend the pound it is having trouble eliminating black market trading.
Whether one blames the speculators, greedy dealers, or the public panic, the facts remain the same: if there are not enough dollars on the market, the market will turn black.
By late 2012, the dollar was fetching LE6.5 on the official rates, but the black market rate was well over LE7.
Economists working for the major financial firms have forecast further drops in the pound, though the Central Bank has denied that this is a threat. But the market is no longer paying attention to official statements, and experts expect the black market rate to climb to LE7.75 to the dollar before the end of June 2013.
Since Hisham Ramez succeeded Farouk Al-Okda as Central Bank governor in early 2013, the bank has been selling dollars to the commercial banks by auction. Three auctions are held every week, but total sales are usually under $40 million, not enough to stop the hunger for hard currency.
In mid-March, the dollar fetched LE7.6 on the black market, and a week later it bounced to LE8.2, causing some panic among traders and the public in general. Such fluctuations in the exchange rate are tricky since they upset the stock market, gold market, and even commodity markets.
As the Egyptian pound stumbled, investors began selling their stocks for fear that the market would collapse. Meanwhile, the price of 21-carat gold, the most often traded, jumped from LE325 to 347 per gramme.
Some food items have been reported to have doubled in price overnight. The turbulence has been considerable, even by the usually conservative official estimates. According to the Central Agency for Public Mobilisation and Statistics (CAPMAS), the rate of inflation of 7.6 per cent in February 2013 was the highest over the past two years. It blamed the rise in inflation on the change in the exchange rate.
The Central Bank blamed the usual suspects, picking out “racketeers” for special criticism. Bank officials promised that they would deliver a “painful blow” to speculators, before deciding to sell $600 million at the bank’s next auction. Depressing the market in one fell swoop may be a lesson to the hoarders, but not if the impact is short lived.
According to the Central Bank, the $600 million sale to the banks would be dedicated to the purchasing of food as well as medicine and spare parts. At this point, the Arab countries came to the rescue, with Qatar promising to buy $3 billion of Egyptian government bonds (it had already deposited $5 billion with the Central Bank) in order to keep the country going. Libya offered to lend Egypt $2 billion, and Iraq promised a further $2 billion in loans.
For now, the bank is doing all it can to prove the speculators wrong. It is also watching cash flows into and out of the country like a hawk and has instructed the commercial banks not to offer importers credit unless it is for basic necessities. It may also force exporters to deposit their entire revenues in Egyptian banks.

KEEP TAKING THE MEDICINE: For now, these remedies seem to be working. The dollar has temporarily stabilised at about LE7.5 to the dollar on the black market, almost 10 per cent over its official rate of LE6.85. Banking sources say that the Central Bank may allow the official rate to rise to LE7.3, so as to narrow the gap with the black market.
Yet, these measures have focused on managing rather than resolving the crisis. When all is said and done, it is the country’s shortage of foreign currency, and not the greed of racketeers, that has been pushing the pound over the edge.
“The measures taken by the Central Bank are not going to stop the rise of the dollar versus the pound, for the problem is a lot bigger than that,” commented Ahmed Salim, a manager at the Arab African Bank, who added that unless the political and security situation improved, which was not likely before political consensus was reached, things would not get better.
Tourists and investors are averse to spending their money in countries experiencing persistent disturbances. “Reaching a societal and political consensus and resolving the security crisis are the keys to addressing the problems of the economy and the exchange rate,” Salim said. Egypt’s attempts to borrow from Qatar, Turkey, Russia, and the IMF were unlikely to be enough to solve the country’s problems. “These are not real solutions. They are simply palliatives.”
Meanwhile, Egypt has its heart set on a $4.8 billion loan from the IMF, which is attractive for several reasons, one of which is the low interest rate involved. The interest on the IMF loan is one per cent, compared to the four or five per cent on the Qatari loan. While an IMF loan may be harder to obtain than loans from friendly nations, it is regarded by the international community as tantamount to a clean bill of health.
If the IMF offers Egypt the loan, this will be an indication that Egypt is capable of meeting its financial obligations, which will raise its credit rating, recently downgraded by Moody’s and Standard and Poor’s. An IMF report written a few months ago suggested that Egypt would qualify for further loans totaling $14 billion if it reached an agreement with the IMF.
It is for this reason that the government has been determined to seek the loan, despite the fact that the opposition has not been excited about it and that the former ruling Supreme Council of the Armed Forces (SCAF) snubbed it. But getting the loan is not going to be easy: the IMF will not approve the loan unless the government agrees on austerity measures involving the removal of subsidies and an increase of taxes. The government is not willing to do this, given the political pressures it faces.
When President Mohamed Morsi cancelled additional taxation that would have raised the prices of certain foods, including necessities like cooking oil, the IMF called off an initial agreement that it had signed with Egypt in late 2012. Taxation is only one of the obstacles facing a deal with the IMF. Another one is subsidies, which now cost the government a total of LE1.2 billion annually.

PROBLEMS OVER SUBSIDIES: Subsidies have long been a controversial issue, partly because of their political sensitivity and partly because economists doubt that the present system allows the subsidies to benefit the targeted groups. Former finance minister Al-Morsi Hegazi even claimed that 30 per cent of subsidised diesel oil found its way onto the black market.
Unconfirmed reports have spoken of a squabble between Central Bank Governor Ramez and former petroleum minister Osama Kamal over money spent on importing oil products. Ramez was reluctant to authorise expenditure on these products so as not to jeopardise food imports. As a result, the country has been facing shortages of various types of fuel as well as power cuts.
Because the government is eager to hold onto its currency reserves for as long as possible, it has been falling behind in payments to oil companies operating in Egypt, with outstanding payments estimated at almost $6 billion. When these companies threatened to shut down their operations in Egypt unless the government honoured its obligations, the government paid them $1 billion and promised further payments in Egyptian pounds. The government is now seeking to buy oil products on easier terms from Iraq, Libya, and Russia.
The government has made no secret of its wish to cancel the fuel subsidies in a gradual manner. “There is no other country in the world that subsidises factory fuel,” said Industry Minister Hatem Saleh at a recent press conference, adding that the fuel subsidies would be phased out within three years and that the government would focus instead on more labour-intensive products.
According to Saleh, about 100 energy-intensive factories are using up to 70 per cent of the subsidised fuel bought by the industrial sector. And experts say that nearly 30 per cent of the fuel and bread subsidies also fail to reach the target groups. To address this problem, the government has been studying a programme to hand out coupons to these groups, thus ending the universal subsidies system that has been in effect for decades.
Before losing his post two weeks ago, petroleum minister Kamal had said that the coupons system for gasoline would start in June 2013. Motorists driving cars whose engine size was smaller than 1,600 cc would be allowed five litres of gasoline per day in subsidised prices, he said, while the rest would have to be bought at full market price. Trucks would be allowed 27.5 litres per day at subsidised prices.
Bottled gas for home consumption will also be sold through coupons at LE5, almost half as much as the market price (although they were being sold on the black market for a lot more recently).
Despite its reluctance to meet the IMF’s requirements, the government is still hopeful that a deal can be reached, and government officials who took part in the IMF and World Bank meetings in Washington recently hinted that the loan deal could be signed this month.
For its part, the IMF has said that some progress has been made in the talks and that Egypt has proposed an economic reform programme that was mostly acceptable. But there has been a lot of scepticism in both the local and the foreign press, with writers pointing out that the IMF has not been convinced that Egypt is serious about economic reform.
For now, it has been mostly fire-fighting on the Egyptian monetary front. The country’s reserves of foreign currency seem to have stabilised in the vicinity of $16 billion, which means that the Egyptian pound may also be spared more humiliation for now.
Yet, with every passing month the need for a more radical solution mounts. And that solution is in the hands not of the economists or the bankers, or even the racketeers. It is in the hands of the country’s politicians.